Hire Purchase of Asset
THERE ARE A NUMBER OF DIFFERENT METHODS OF PAYING FOR AN ASSET PURCHASED:
- OUT OF THE COMPANY FUNDS HELD AT BANK
- BANK LOAN DRAW DOWN
- FINANCE LEASE
- HIRE PURCHASE
Assets can be financed through a finance company by either a Finance Lease or Hire Purchase. The two main differences between both methods of finance are:
The finance company itself claims back the total vat at the time of financing the asset as opposed to the client. The leasing company then charges vat on each monthly repayment the client makes which the client claims back from Revenue each month.
The client claims back the vat element in full directly from Revenue in their next vat return after purchase. In turn there is no vat charge on each monthly hire purchase repayment.
2. CAPITAL ALLOWANCES
The capital allowances allowed in the calculation of the year end tax return are capped for assets financed via Hire Purchase agreements.
ASSETS PAID THROUGH HIRE PURCHASE
If the Asset is financed, then the finance company is paying for the asset and you are repaying the finance company periodically. **Do not post a Purchase Invoice**
This finance arrangement allows the purchaser themselves to claim back the vat element in full in their next vat return after purchasing the asset.
RECORD THE FINANCE EXTENDED BY THE HIRE PURCHASE FINANCE PROVIDER
Accounts Production> Journals> Ordinary Journals>
Enter the Date of the Hire Purchase Finance Agreement / Date Finance effective
Description of the Hire Purchase Agreement and Asset financed, e.g. description of asset & lease agreement number
Choose the appropriate Asset account from the listing and DEBIT it with the NET cost (i.e. excluding VAT) of the asset purchased.
Hire Purchase Account
Choose the appropriate Hire Purchase Account from the listing and CREDIT it with the Finance Amount extended.
Choose the VAT account and DEBIT it with the VAT charged on the purchase of the Asset.
Click "Post Entry" to save the transaction entry.
REMEMBER : IN THE NEXT VAT RETURN THE NORMAL VAT REPORT WILL NOT REFLECT THE VAT ELEMENT POSTED ABOVE AS IT IS POSTED DIRECT TO THE NOMINAL VAT ACCOUNT VIA JOURNAL ENTRY. YOU MUST MAKE A MANUAL ADJUSTMENT TO THE NORMAL VAT REPORT TO ADJUST FOR THE VAT ELEMENT TO BE RECLAIMED.
PERIODICAL HIRE PURCHASE REPAYMENTS
To record each periodical payment to the HP Finance Company
BANK > PAYMENTS
Select the bank account from the drop down list from which the payment was made (bottom right hand corner of entry screen). It is important that you ensure you are working from the correct bank account at the start.
In this case it is the Direct Debit reference, e.g. DD
Date of Direct Debit
Select a Payee from the existing list (F2) or type the first letter of the Payee name, use arrow down key to scroll through the existing Payee names.
To setup a new Payee simply type the new Payee name. The program will recognise the new name does not already exist and prompt you to specify if it is a new “Supplier” or “Other”, select “Other” to add the new name to the Payee list.
It would be advisable to set up the Payee in the name of the Finance provider with the Hire Purchase Agreement number. This Payee will then be selected for all future HP repayments.
Choose the Hire Purchase Account
Enter the total amount of the periodical repayment.
VAT is not applicable to HP repayments and should be left at zero as the total VAT.